The Hindu Business Line : Oil barrels that went missing and a director tired of lying

A FEW days back, there was a story in www.timesonline.co.uk about Shell director Van de Vijver who complained that he was "tired of lying" about the state of the company's oil and gas reserves. In what could annoy Shell's investors, Vijver is to be paid £2.5 million in compensation for losing his job as head of oil exploration in the Anglo-Dutch multinational.

"The US Department of Justice is still investigating the misreporting of 4.4 billion barrels of oil and gas, a fifth of the company's reserves," notes the story. Last month, the company arrived at a settlement with the US Securities and Exchange Commission and Britain's Financial Services Authority; accordingly, Shell is to pay fines of $120 million and £17 million, respectively, "without any admission of charges of market abuse and breach of securities laws." The tally of losses and gains is that Shell investors lost 50p "for every barrel that went missing" while the perpetrators earned 80p "for every barrel mislaid". Quite a bombshell, that is.

Let me now turn to the report of American law firm Davis Polk & Wardwell submitted to the Shell Group Audit Committee, dated March 31, 2004, and available at www.shell.com/static/investor-en/downloads/gac_report.pdf. It arose from a request from the company and audit firms KPMG and PWC. The investigation took the assistance of "independent petroleum engineers to advise on technical issues", and also experts for "forensic analysis and data retrieval from individual desktops and laptops and Shell servers." A good fit for discussion in one of the CPE programmes of the ICAI, I'd suggest, with a credit of two hours.

The report has snatches from company e-mails such as: "The market can only be fooled if i) credibility of the company is high, ii) medium and long-term portfolio refreshment is real and/or iii) positive trends can be shown on key indicators."

"RRR is the most important share price influencer also as expectations are high and they do not know that we are still paying for aggressive reserves bookings (including thos[e] that have not reached FID yet!!) in the past!"

RRR is not real rate of return but `reserves replacement ratio', a ratio of that cheers the market in case it is more than one.

From www.valueline.com, I learn that RRR is a metric relevant to natural gas and petroleum industries, and that it is the ratio of reserve additions to production.

"Reserve replacement is calculated by summing the total reserves added over a five-year period. The ratio is calculated by dividing replacement by production over the same period." And, to know about FID, I read a story in The Guardian that cites Robert Plummer of consultancy Wood Mackenzie: He identifies "five stages from discovering oil, through appraisal of the find, engineering work, making commercial arrangements such as project finance and negotiating contracts for output to the final investment decision (FID), when a company commits to recovering the oil and/or gas."

Elsewhere in the law firm's report is an excerpt from another e-mail from Vijver: "I am becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings."

The report suggests remedial measures that make lot of common-sense reading. For instance, there's one about the need for clarity in the company guidelines:

"Reduce the length of the guidelines to produce a more user-friendly manual for petroleum engineers, finance staff and other relevant parties with clear language concerning the criteria for booking and de-booking, using the assistance of independent petroleum engineers and counsel."

Another example comes at the end: "In order to create a culture of compliance, it is essential that Shell's senior management emphasise to all employees that integrity and compliance concerns must be raised with the internal audit or legal functions, and must be investigated thoroughly and openly, regardless of who is involved. This policy should be communicated forcefully and frequently."

While Shell's problem was about oil below the earth, ours is about what gets into fuel tanks. Here, we are worried whether our own oil companies have practices that can stand the test of independent scrutiny. At least in the case of price determination of petroleum products — an exercise that impacts millions in the country — one learns that it is something done by the oil marketing companies themselves every fortnight, and they consult the Ministry only if necessary.

When I met Mr Sunil Goyal, the president of the Institute of Chartered Accountants of India a few days back, I asked him if it would be a better practice to involve a few reputed firms of CAs in the exercise, to impart independence to the process. And he was visibly enthusiastic about the idea.

"War is too serious a matter to entrust to military men," said Georges Clemenceau. Perhaps, one can adapt the quote to petroleum pricing too: It's too serious a matter to be entrusted to oil companies.

Accountspeak@TheHindu.co.in

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